A guy for Uncle Vince’s bonfire

Another day, another regulation added to the bonfire. At this rate, the Downing Street garden looks like quite the place to be a week on Saturday.

This time it’s a proposal, in a report by Adrian Beecroft, to end the right to claim unfair dismissal in all but discrimination cases. According to the Daily Telegraph this proposal is being taken seriously in Downing Street.

If it seems like only a few months ago that the Government was setting out its proposals to increase the qualifying period for unfair dismissal claims from one year to two, that’s because it was. But these are revolutionary times: onwards, Comrades!

Uncle Vince justified the proposed reduction in qualifying periods, and an associated proposal to introduce fees for bringing claims in the Employment Tribunal on the grounds that “the fear of a tribunal is a major impediment to … hiring people.” Mr Beecroft (who is described as a venture capitalist) has different reasoning: he says that being able to fire poor performers more easily will “in the long run … increase employment by making our businesses more competitive and hence more likely to grow.”

Let’s look at Uncle Vince’s claim first: do businesses decide not to hire, in circumstances where they otherwise might, because they are worried about the cost and hassle of an ET claim?

Strangely enough, in all of the media coverage I couldn’t see any actual evidence of that claim by way of actual numbers. If anyone knows of any such evidence, I’d be grateful if they could direct me to it.

In the meantime, using a handy packet of Marlboro Golds (other cigarette brands are available) and a knackered ballpoint, here’s a rough estimate of the current state of play.

Meanwhile, NOMIS labour market figures show that around 29,000,000 people were in employment in the UK in 2010. That means that unfair dismissal claims represented (speaking very roughly) 0.17% of total employees.

Obviously a number of grievances will have been raised and settled before a claim was brought, and those aren’t included in the stats. To the best of my knowledge there are no figures for those, but given the leverage afforded to a dismissed employee by the bringing of a claim I’d be surprised if it lifted the overall percentage of formal disputes to as much as 0.5%.

Now, businesses consider hiring new staff because they think that additional headcount will lead to more revenue and profit (i.e. that the additional employees will bring in more income than the cost of their employment). I think it’s reasonable to suppose that the chances of that additional profit arising need to be more than 50% to justify the hiring decision.

So you have a greater than 50% chance of more profit, versus a 0.5% chance of an unfair dismissal claim. On that basis, and assuming a rational decision-maker, only the most marginal hiring decisions could be affected by the risk of a claim*.

An obvious point here is that employers might overestimate the risk of an employment claim, and that that might be especially the case if they have been the subject of a claim in the past. That might then skew their risk assessment, so that they forego hiring in circumstances where the risk is in fact low.

I’m sceptical about that for two reasons. First, like all in house lawyers, I know how difficult it is to get people interested even in big risks if there’s money to be made by ignoring them. Second, it seems just as likely that an employer will learn lessons from an unfair dismissal claim, and act to reduce the risk of it happening again.

In large businesses (and admittedly Uncle Vince was talking about small businesses) there is also the budget effect. Unfair dismissal damages are not budgeted for, because they are contingent costs and may not even be allocated to the hiring managers cost centre. That means that hiring managers, having no direct responsibility for, or maybe even a view of, the overall business cost, have no reason to take the unfair dismissal risk into account when deciding whether or not to hire.

Of course, this is an overall view of the risk, and there are reasons why the actual risk for individual businesses may be higher. For example, you might actually intend to treat your staff badly – but that couldn’t be Government policy, could it?

Anyway, let’s assume that you’ve overcome your terror of the Employment Tribunal and actually hired people. Is Adrian Beecroft right when he says that it’s near impossible to fire them if they turn out to be no better than they ought to be?

Well, even Adrian would have to acknowledge that employees actually do get fired for poor performance. But it is undeniable that in order to avoid unfair dismissal claims a proper process must followed, and that there are costs associated with this.

However, provided you don’t unlawfully discriminate (and Mr Beecroft does not propose to change this) you can fire people pretty much at will in their first year of employment. Soon, according to Uncle Vince, this will be in the first two years.

I’m going to go out on a limb here: I reckon you can tell a lot about somebody’s performance in a year, if you’re paying attention. That should be easily long enough to deal with the people who, with hindsight, you should never have hired.

But let’s say that you can’t tell, or that your employee starts off well but drops off substantially over time. For big, obvious issues, like unscheduled absences, rank incompetence, etc, it’s not that hard for a competent manager to follow the process required to avoid a tribunal.

So the real issue is probably borderline performance issues – doing just enough, or just below enough. Then (and I know this from experience) it can take a lot of time and effort to either correct the problem or get to a situation where you can fairly dismiss.

One might argue that the function of line management is to do exactly that, through motivation and performance review. But Mr Beecroft has steered clear of using “We can’t be bothered to manage properly” as his slogan, so we must give him the benefit of the doubt.

Let’s confine ourselves, then, to noting that there is in fact an existing mechanism for dismissing employees immediately without reason, with a much lower risk of an ET claim: the compromise agreement. In other words, a binding agreement under which the employee gives up their right to bring a claim in return for a tax-free (up to a specified amount) compensatory payment.

A compromise agreement isn’t exactly a silver bullet, given that it is a statutory requirement that the employee receives independent legal advice and that advice is very often to ask for more money. On the other hand, you’d be surprised how many people settle for their notice pay, with the tax-free bit as a nice add on.

I’m also told that some employers, wanting to avoid the hassle of employee rights altogether (save for the limited protections offered by the Agency Workers Regulations), choose to hire agency workers instead of payroll headcount. That seems to suggest that reducing protection for permanent employees towards that enjoyed by temporary workers would leave the overall employment position unchanged.

So I’m sceptical about the claim that removing unfair dismissal rights would increase competitiveness in a way that would lead to job creation. I’m even less convinced that it would do so to an extent that would justify the dilution of employee rights to the extent proposed.

But I’m trying to be open-minded and not assume that this is the usual “regulation is evil” mantra. So here’s an offer: if you can show me some genuine and convincing evidence (not anecdotal) for the claims of Uncle Vince or Adrian Beecroft, I’ll send you a Bizzle for your bonfire.

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*Obviously the risk and reward have different magnitudes as well as probabilities. So we might say that, for a hire with an annual salary of £15,000 and a 51% chance of 10% profit on that cost, the present value of the potential reward (ignoring non-salary costs) is £1,500 x 0.51 = £765, versus the present value of the one year UD risk assuming the maximum non-discrimination UD award for 2010 is 0.005 x £65,300 = £326.50. Not as marginal, but still clear.

They quote a British Chambers of Commerce survey (which that organisation’s employment adviser referred to on tonight’s Channel 4 News) that showed that 39% of 2,000 small businesses surveyed said that they found the UD rules “fairly or extremely burdensome”. But that survey didn’t ask whether those businesses held back from hiring because of that.

They also found a Chartered Institute of Personnel Development survey of larger businesses, which found that 5.7% said that the possibility of UD claims had discouraged them from hiring. That’s not a big number, and it’s possible (depending on how the question was phrased) that respondents didn’t mean that they were always or even frequently discouraged, only that they had been on at least one occasion.

The FactCheck post also covers Adrian Beecroft’s claims about increased competitiveness, and concludes (whilst acknowledging that the full report has not been published) that his case looks weak.